Fed Express & Jimmy Fand and the Tile Connection
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Federal Express achieved extraordinary success in the 1970s with a pioneering approach to overnight letter and package distribution in the United States. After many successful years of serving customers with the pledge “When it absolutely, positively has to get there overnight,” Fed Ex’s growth in the United States slowed considerably. One problem was arch-competitor United Parcel Service, which started overnight package deliveries in 1982. In addition, the increasing popularity of fax machines began to erode demand for overnight letter delivery. Accordingly, founder Frederick Smith began to look abroad for new growth opportunities.
International delivery services had been part of Smith’s strategic plan since the early 1980; s. Between 1983 and 1990, FedEx made more than 20 international acquisitions, including courier services and trucking operation. Unfortunately, strong overseas rivals such as DHI Worldwide Express and Australia-based TNT were becoming entrenched in Europe at the same time. Another problem was foreign government regulations, For example, Japanese regulators took steps to protect local express companies. It took three years of negotiations before FedEx could get permission to make four flights a week from Memphis to Tokyo. Then, in May 1988, just days before service to Japan was to begin, FedEx was informed that no packages weighing more than 70 pounds could be flown into Tokyo, even if they were en route to other destinations. The result: FedEx lost more than a million dollars per month on the Tokyo route for a year.
In December 1988, Smith announced his intention to acquire Tiger International, the world’s biggest air heave-cargo company, which included the Flying Tiger Line. FedEx gained delivery routes in North and South America that it could service with its own airplanes plus Flying Tiger’s fleet of long-range aircraft for use in the international heavy-frieght industry. Tiger also provided FedEx with additional routes in Europe. Although the price tag was steep-$880 million-Smith believed that the acquisition was an important step toward his goal of making FedEx “the largest and best transportation company in the world.” This statement said a lot about Smith’s ambitions. In fact, Business Week magazine concluded that, of all the factors contributing to the success of FedEx, the most important might well be Smith’s overwhelming desire to be number one. As Smith confidently proclaimed in 1988: “We consider our international business to be as important as our domestic business.”
However, the Tiger acquisition brought with it a number of challenges. First, the move more than doubled FedEx’s debt, to $2.1 billion. Second, Tiger’s system was designed for slow-moving heavy freight-a sharp contrast to FedEx’s high speed network for handling small packages. A third problem: DHL and TNT seemed likely to follow FedEx’s lead and make their own acquisitions to expand globally. Finally, and perhaps most important, FedEx stood to lose customers that had traditionally used Flying Tiger. Some of these customers, such as UPPS and DHL World Airways, were actually FedEx’s competitors in the overseas express delivery business. They relied on Tiger for shipping to countries where they had no airport landing rights.
A related issue concerned freight forwarders, companies with no airplanes or trucks that contract with customers to provide door-to-door delivery of shipments anywhere in the world. Freight forwarders booked space in planes and ships, took care of paperwork, hired trucks, and took care of all the red tape. In the United States, FedEx had to reassure such customers that it would not encroach on their business, lest freight forwarders work with another carrier. Some industry observers expected passenger lines like Northwest and American Airlines to seek business from disgruntled freight forwarders.
Despite these hurdles, FedEx had gained the ability to operate in all 12 countries of the European Community and was thus well positioned to take advantage of reduced restrictions on surface transportation companies that were expected in 1992. The acquisition meant FedEx could seek additional growth overseas faster than if it tried to develop the foreign business on its own, especially in Asia.
Still, Federal had to change some parts of its formula to meet the needs of its new markets. For example, headquarters designated a 5pm deadline for pickups on the European continent, even though it is customary in Spain for employees to work until 8 p.m. Also, all of FedEx’s brochures and shipping bills were available only in English, a situation that has only recently been addressed. In general, overnight delivery has not been nearly as popular in Europe as it has in the United States. One symbol of the European pace: FedEx became owner of a German-based barge business, and barges pained with FedEx’s distinctive orange and purple colors could be seen floating down the Rhine carrying salad oil.
By 1992, it became clear that the European market was much harder to crack than Smith had thought. Losses from four years of operations totaled $1.2 billion, forcing a cost-cutting campaign. About 6,600 employees were fired, and FedEx operations in 100 cities across Europe were closed. Some of its delivery business between the United States and Europe was contracted out to other firms. Meanwhile, rivals UPS and DHL began picking up some of FedEx’s former customers.
What went wrong? Besides the fierce competitive rivalry, Smith concedes he overestimated the size of the market, expecting daily shipment volume to approach the U.S. level of three million units. In anticipation of this growth, Smith set up an operations center in Brussels that duplicated the hub-and-spokes approach that had been at the heart of the company’s U.S. success. Unfortunately, the volume of European express shipments leveled off at about 100,000 units per day. Many of the planes in FedEx’s fleet flew their routes with partial loads. To address this problem, Smith began to deemphasize the heavy cargo business and focus on the more lucrative small package overnight business. Also, he replaces some of the company’s older 747 cargo jets with smaller, more efficient aircraft; the resulting savings on the Hong Kong-Anchorage route alone could amount to $12 million.
Meanwhile, the nature of the express delivery business was changing. DHL had begun offering “same day” delivery in the late 1980’s; FedEx launched a similar service in June 1995. The global opportunities for package delivery and related services were huge; in 1994, the United States accounted for only 5 percent of the market, or a total of 61 million of the 1.1 billion industry shipments. DHL’s global strength could be inferred from the fact that only about 25 percent of its 95 million shipments were generated in the United States. DHL, FedEx, and UPS all stressed technology as ways to differentiate themselves from each other. Al three companies offered PC software that allowed customers to track their packages from desktop computers. In March 1995, FedEx became the first of the three to have a home page on the World Wide Web from which customers could obtain information and order pickups. All three companies offered logistics support to companies seeking assistance with warehousing and mail-order distribution. FedEx Vice President Robert Miller noted, “Our industry has become central to how companies do business, and they are putting within our hands increasingly larger parts of their business.”
1. Why did FedEx decide to “go global”? Do you agree with the decision?
2. Evaluate FedEx’s European entry strategy. What mistakes did management make?
3. Formulate a new European entry strategy for FedEx.
4. What are the future prospects for FedEx, DHL, and UPS around the world
Jimmy Fand has built his business from the ground up literally. A high school dropout in his native Colombia, Fand traveled extensively as a youth and ended up in New York City. After completing his education and working as a teacher, Fand moved with his growing family to Tampa, Florida. Today, Fand is the owner of the Tile Connection, the largest importer of ceramic tile in the United States. As is the case with many other entrepreneurs, Fand’s inspiration for starting a business was the result of simple observation. While shopping in Tampa for tile to install in his own home, Fand came to the conclusion that prices were too high and the selection in Tampa inadequate. Realizing that this situation represented a market opportunity, Fand set up his own distributorship in Florida and began importing tile.
Because Fand had earned a degree in geology, his expertise helped him as he searched the world for ceramic tile manufacturers that could satisfy his rigorous quality requirements. Fand understood that, to carve out a niche for himself in the local market, he had to offer products that were truly superior. Fand’s three criteria for suppliers are quality, availability, and price. Important tile-producing countries include Italy, Spain, Portugal, Colombia, and Brazil. Tile is also manufactured in the United States, but Fand could not find the types of tile he was looking for, and U.S. producers could not maintain a consistent supply of the quantities he needed at a competitive price. Fand buys only from manufacturers that are reliable and capable of meeting his quality standards. For example, after assessing nearly 1,000 tile producers in Italy and Spain alone, Fand concluded that fewer than 100 factories were capable of meeting his standards.
Before starting the Tile Connection, Fand gained considerable experience and wisdom through his involvement in other business ventures. He knows that market research can give him an edge on competitors and endeavors to understand what styles of tile are likely to be popular with his customers. Fand has also learned that high overhead can be fatal to a business and that proper money management and strict financial controls are crucial. Fand takes pride in the excellent credit rating that he has built up with his vendors. When buying goods abroad, many small importers are required to open a letter of credit (L/Cs). Such trust does not come automatically in a business relationship; it must be earned. Fand’s practice is to pay bills on time. “That, to me, is sacred,” Fand says. “That money doesn’t belong to us; it belongs to the suppliers who in turn need it to pay their employees.” When paying, Fand makes sure that bank-to-bank transfers are carried out on the day bills are due.
Strict attention to financial considerations is not Fand’s only concern. Because his business is international in scope, he has to pay particular attention to the logistics of transporting fragile tile from his far-flung network of suppliers. Fand takes advantage of containerization, a modern form of transportation technology with steel trailers measuring 20 feet, 40 feet, or longer. To minimize breakage and protect the tiles, Fand requires that his manufacturers ship the tiles on special tilt-resistant pallets with special corner beads. Once the pallets are loaded in containers, the containers are sealed and transferred via truck or rail to a port in the country of manufacture. The tiles then make the trip to Tampa by ocean-containers for entry into the United States; they are shipped to the Tile Connection’s warehouse. There, Fand inspects each container to make sure the seals have not been tampered with.
In Fand’s view, it is easier than ever to conduct business abroad. He notes that the United States is surrounded by friendly nations and that other countries are only hours away by airplane or seconds away by telephone or fax machine. Still, many American business owners are reluctant to become importers or exporters. Some are held back by a lack of knowledge of market opportunities abroad, and others simply have misconceptions about those markets. Fand explains, “The more we look for international places to deal with, the more chances of success we can have. we can sell our products to those people as well as buy their products and distribute them as I do”. Many U.S. business owners speak only English and believe this is an obstacle to doing business abroad. Fand points out that the U.S. Commerce Department, local Chambers of Commerce, and private organizations have qualified translators available to facilitate business relationships.
Despite the fact that such resources are readily available, Fand knows from experience that it takes a major investment of managerial time to succeed in any business, especially an international one. “Perspective importers should be cautious about who they deal with. Go to trade shows, meet manufacturers and agents that represent those manufacturers as well. You need to do a lot of homework in finding out the products you need to buy, and whether or not they are good products for you marketplace.” Fand advises. Prospective importers must learn to identify and eliminate from consideration any factories that do not maintain quality controls. The other side of the equation for importers understands the needs of the local market and customers. Fand monitors the Florida market closely and attempts to stay ahead of competitors by anticipating the types and styles of tile that will be in demand.
Fand is proud of his business success, and he knows he has earned it himself through hard work. “I’m self made,” he says.” A lot of people are used to getting things for free, but only those who work hard for those things are able to appreciate them.” But he also knows there are important things in life besides work. What does he value the most? “The ability to be a human being. To think in terms of the needs of others. To create, to raise your family with very high standards, and to raise them with a high degree of education.”
1. What are some of the nuts and bolts of exporting and importing that are relevant to Jimmy Fand and the Tile Connection?
2. What must a small-business owner be willing to do to succeed in global business?
3. Describe Jimmy Fand’s sense of social responsibility and what ethics means to him.